Frequently Asked Questions

Exchange-traded funds (ETFs) are baskets of stocks, bonds, or other assets that are pooled together into a single entity that investors can buy shares of intra-day on stock exchanges through their brokerage accounts. ETFs are very efficient investment vehicles that provide access to a variety of investments and investment strategies previously inaccessible to many investors.

Covered call strategies are often used to generate income within an investment portfolio; especially with names that has low capital appreciation potential in the short-term. It involves holding a long position in a stock and simultaneously selling (or "writing") a call option on that same stock. This can be a way to generate additional income from the stock, above and beyond any dividends or price appreciation.

When you sell a call option, you receive a premium from the buyer. This premium is the income that is generated from the covered call strategy. You keep this premium no matter what happens to the price of the underlying stock.

However, by selling the call option, you are giving the buyer the right (but not the obligation) to purchase the underlying stock at a predetermined price (the strike price) before the option's expiration date. If the stock's price stays below the strike price, the option will likely expire worthless, and you keep both the stock and the premium.

If the stock's price rises above the strike price, the option may be exercised by the buyer, and you would be obligated to sell the stock at the strike price. This caps your potential profit from the stock's appreciation at the strike price, but you still keep the premium. In essence, the covered call strategy generates income by accepting a limit on potential price appreciation for the underlying stock. It's considered a conservative strategy and can be useful for investors who are looking to generate income from their existing stock holdings without taking on significant additional risk.

A plain covered call also reduces how much of the underlying asset's price movement you keep. Kurv's strategies are designed to hold exposure closer to one-for-one with the underlying while still collecting premium.

Premium harvesting in investing is a strategy that involves selling options to collect the premiums. Here's how it works in more detail:

Options are financial instruments that give an investor the right but not the obligation to buy or sell an underlying asset at a specific price within a set period. When you sell an option, you collect a premium from the buyer. This premium is essentially the price of the option, and it provides income to the seller.

Premium harvesting aims to consistently collect these premiums by selling options, typically on a regular basis. This strategy can be used with various types of options, including puts and calls. By carefully choosing the strike prices and expiration dates, the investor seeks to balance the risk and reward.

It is worth noting that premium harvesting is not without risk. If the underlying asset moves significantly against the position, the investor may be obligated to fulfill the contract at a loss. Effective implementation requires skilled options trading and execution as well as dedicated monitoring to reduce costs and to maximum premium harvesting.

No — while a covered call strategy can be a valuable tool for generating income, it is not a one-size-fits-all approach. It suits investors who want current income and will accept a limit on upside in exchange for it. It suits you less if your priority is capturing an asset's full appreciation, or if you need a predictable fixed payment, since option premium varies with market volatility. Consider your objectives, time horizon and risk tolerance, and read the fund's prospectus.

Return of capital is a distribution made by an ETF to its investors that is classified as a return of the investor's original investment. Unlike dividends or interest income, return of capital is not considered income, and is not immediately taxable. Instead, it reduces the investor's cost basis in the ETF, which can potentially reduce the amount of capital gains tax owed when the investor sells their shares. Return of capital can be common and expected for ETFs that use option writing strategies.

The trade-off is that a lower cost basis can mean a larger capital gain when you eventually sell, so it defers tax rather than avoiding it. Each fund's 19a-1 notice shows the current estimated breakdown, and the final tax characterisation arrives on your Form 1099-DIV.

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An ETF structure can address three key challenges for covered call strategies. While a covered call strategy is a popular method used to generate monthly income flow by institutional investors and investors with large assets, it has not been available to all investors without understanding operational complexity to write calls, and constant portfolio risk monitoring to optimize yield harvesting. ETFs can address these areas with operational efficiencies in providing consistent exposure across multiple client portfolios; portfolio and risk management, leaving advisor time to make decisions on client portfolios as well as access for investors of all sizes.

Investors often associate fund size or trading volume with ETF liquidity. This leads to the assumption that newer funds (i.e. funds with small amounts of assets under management or low trading volume) will be difficult to trade. This is not always the case.

ETF liquidity is determined mainly by the liquidity of its underlying holdings, or its “primary liquidity.” How much an ETF trades within a given day, its “secondary liquidity”, is a lesser factor. Often, when an ETF is new, secondary liquidity can appear small, yet primary liquidity may be deep - thus providing investors with the opportunity to achieve great execution of orders both large and small.

For most individual investors, we recommend using a limit order. A limit order places a maximum price to be paid (for a buy limit order), or a minimum price to be sold (for a sell limit order). It’s akin to saying “only trade if we get this price or better.” To choose a limit order price, we recommend looking at the current best bid/ask quote. As a buyer, you may want to set a limit just below the current ask. As a seller, you may want to set a limit just above the current bid.

Note that there is the chance your trade does not get executed if the market moves, and you may need to update your limit to accommodate for this. We would also recommend against using market orders for ETF trading. Market orders, especially those placed early and late in the trading day when the order book is thin, have the potential to execute at a significantly worse price, leading to poor execution.

Two further habits help: avoid trading in the first and last few minutes of the session, when spreads are typically at their widest, and check the fund's bid-ask spread and premium or discount before placing a larger order.

When trading ETFs, it‘s important to look beyond daily volume, and other on-screen indicators to assess liquidity. For any questions related to Kurv ETFs, including executing trades, please reach out to info@kurvinvest.com.

Distribution rate is the annualized rate an investor would receive if the most recent fund distribution remained the same going forward. The distribution yield represents a single distribution from the Fund and is not a representation of the Fund's total return. The distribution yield is calculated by multiplying the most recent distribution by 12 in order to annualize it, and then dividing by the Fund's NAV.

Usually yes, but how they're taxed depends on what the distribution is made of. A single monthly payment from an option-income ETF can contain several components — ordinary income, short- and long-term capital gains, and return of capital — and each is treated differently. Return of capital isn't taxed in the year you receive it; it reduces your cost basis instead. The final breakdown for a tax year is reported on your Form 1099-DIV, and the monthly estimates appear in each fund's 19a-1 notice. Kurv does not provide tax advice — the mix depends on your own circumstances, so please speak to your tax advisor.

They answer different questions. Distribution rate is the annualized rate you would receive if the most recent fund distribution stayed the same going forward — it includes option premium and any return of capital, so it reflects the total cash paid out. The 30-day SEC yield is a standardized figure based on the fund's net investment income over a trailing 30-day period, and it excludes option premium. That is why an option-income ETF can show a high distribution rate and a much lower SEC yield at the same time: they measure different things. Each fund page shows both figures with their 'as of' date. Neither is a forecast, and distributions are not guaranteed.

Because option premium changes. The cash these funds distribute comes largely from selling options, and option premiums rise and fall with market volatility, the level of the underlying asset, and the strikes and expirations selected. When volatility is high, premiums tend to be richer; when markets are calm, there is less premium available. Kurv publishes distribution estimates ahead of each payment so you can see the figure before it is paid. Distributions are variable and not guaranteed.

Certain exchange-traded options and futures fall under Section 1256 of the tax code, which treats gains as 60% long-term and 40% short-term regardless of how long the position was held. Because long-term rates are lower, that blend can be more favourable than treating the whole gain as short-term. It applies only to qualifying contracts, so it does not automatically cover every option a fund holds, and it does not apply to every component of a distribution. This is general information, not tax advice.

A 19a-1 is a notice a fund is required to send when a distribution may include something other than net investment income. It shows an estimated breakdown of the payment — how much is income, how much is capital gains, and how much is return of capital. Two things to keep in mind: the figures are estimates for that payment and can change, and the final tax characterisation for the year arrives on your Form 1099-DIV rather than the 19a-1. A meaningful return-of-capital estimate is normal for option-income strategies.

A static overlay sells the same kind of option on a set schedule — for example, a call at a fixed distance from the current price every month. An active overlay lets the manager vary strikes, expirations and structure as conditions change, and can buy protection rather than only sell premium. The intent is to keep more of the underlying asset's upside while still collecting premium, instead of accepting the same capped payoff every cycle. Kurv's funds are actively managed. Active management does not guarantee a better outcome, and it typically carries a higher expense ratio than a static approach.